‘Conflict Minerals’ Gold, Tin & Tungsten Face New Layer Of Regulation

July 31, 2012

 

‘Functionality’ And ‘Manufactured’

Neither of these terms is defined within the section, but how both of them are understood is critical to its interpretation. For example, what are the limits of “functionality”? As Edward Wyatt of the New York Times points out in his article Use of ‘Conflict Minerals’ Gets More Scrutiny From U.S., “Is a coffee can made with tin “necessary to the functionality” of the coffee being sold?” Are radios containing tantalum items affecting the “functionality” of an automobile as a way to get around? What about an item made using tungsten carbide high-speed rotary tools? What about ornamentation? And is a mine operator a manufacturer?

As Nicholas Cook of the Congressional Research Service states in his Conflict Minerals in Central Africa: U.S. and International Responses, published on July 20: “A large range of legal, technical, logistical and other types of issues are in play under the Section 1502 rule-making process, as are diverse human rights, transparency, political, corporate financial and reputational (e.g., public relations and consumer perceptions) interests.” These are quite apart from concerns over due diligence standards and how the rules are phased in.

Cook, in detailing further the “Key Issues Under Debate,” describes how “… key legal and technical questions focus on such issues as how final Section 1502 rules will define, operationalize, or treat.” In addition to those mentioned above the SEC has had (and will have) to address the following:

  • Reporting thresholds, if any, in cases where a firm does not control all facets of production of its products (e.g., parts are manufactured by chains of discrete subcontractors contractually unrelated to the final buyer) or has a role limited to product branding and sale (e.g., of generics possibly sourced from multiple vendors)
  • Various derivatives of the minerals and their recombination with other elements to create new substances.
  • Ornamental and other “de minimis” uses of the minerals, or instances where a product unintentionally includes naturally occurring trace occurrences of a conflict mineral
  • Recycled supplies with essentially untraceable origins
  • “Reasonable” credibility standards for mineral country-of-origin inquiries.
  • “Armed groups.” It is unclear how firms would differentiate between state military or police forces at large and those elements of these forces which—based on allegations of human rights abuses or other criminal acts, including illicit involvement in the conflict minerals trade—would be considered armed groups under the law.
  • Indirect “finance or benefit” to armed groups arising from association with a conflict mineral. The threshold or definition for “indirectly finance or benefit” is not stated in Section 1502. The burden of proving an absence of indirect financing or benefit could potentially be large.
  • Firms bound by long-term contracts that precede or may conflict with or otherwise not reflect the requirements of Section 1502 (such as rules potentially requiring immediate implementation and compliance)
  • The status of stocks of materials already in processing and supply pipelines prior to the adoption of the rules
  • Firms covered, as some interpretations of the definition of ‘‘person described” in the law, as written, could arguably be applied to “persons” who are not SEC issuers
  • The standards and responsibilities accountants and auditors will need to comply with to provide required due diligence auditing to firms subject to Section 1502.
  • The technical modalities of reporting language and standards, types of documentation and forms to be employed, and other technical and legal process questions.
  • The basis for determining if compliance costs may be too great for small manufacturers to bear and for determining what costs will be for affected firms, persons and industries.

 

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